Senate Passes Charity Tax Breaks

By a vote of 95 to 5, the Senate has passed legislation that has the potential to significantly affect the way charities attract donations and lobby Congress.

The legislation is a package of tax proposals that were first advanced in the Charity Aid, Recovery, and Empowerment (Care) Act of 2003. The House must now craft its own version of the legislation, which it has promised to do quickly, according to Senate Majority Leader Bill Frist, Republican of Tennessee.

The measure does not include provisions in the original version of the Care Act that would have made it easier for religious groups to obtain and use federal money for social-service programs. Many parts of the Senate’s package mirror provisions contained in President Bush’s budget proposal to Congress. The legislation would:

• Allow people who do not itemize on their income-tax returns to write off some of their charitable cash gifts. Individuals would have to donate more than $250 in a year to qualify for a deduction, and their deduction would be limited to a maximum of $250. The deduction would be temporary — for two years — and cost the Treasury an estimated $2.8-billion. About 70 percent of taxpayers do not itemize.
• Permit people 70 1/2 and older to withdraw money from their individual retirement accounts and donate it directly to charity without being subject to income tax. People 59 1/2 and older could withdraw money from their IRAs and make donations through planned gifts, such as charitable remainder trusts, without paying tax.
• Allow the Internal Revenue Service to share certain information about charities with state regulators, including notices that the tax agency is considering revoking a group’s tax-exempt status.
• Require that charities include on their annual informational tax returns all names under which they operate or do business, and the Web addresses of such entities.

The bill would also make a major change in the way that charities count their lobbying expenses (if the organizations have chosen to calculate such costs as a percentage of their budgets). The provision would remove limits on the share of money that organizations can spend on “grass-roots lobbying” — efforts to rally popular opinion on legislation.

Charities are now allowed to spend no more than 25 percent of their total lobbying expenses on grass-roots advocacy, while allocating the rest to “direct” lobbying of government officials.

Under the legislation, the percentage limit on grass-roots work would be removed so that charities could make any combination of grass-roots and direct lobbying expenditures, up to an overall amount based on the size of an organization’s budget.

The bill did not include President Bush’s proposal, offered in his budget plan, to reduce the excise tax on net investment income for private foundations. Foundations currently must pay an excise tax of up to 2 percent on their investment income. Foundations say that lower taxes would enable them to give more money to charities.

For additional information about the Senate bill, go to the Web site of Congress’s Joint Committee on Taxation, http://www.house.gov/jct.